Government delays decision on fuel prices

New Delhi: The empowered group of ministers (EGoM) to consider raising fuel prices has been deferred, signalling the government’s reluctance to tackle a political hot potato that is needed to bolster public finances but could stoke inflation.

Any hike in prices of diesel and gasoline is expected to be small, given the political sensitivity of such a move for hundreds of millions of poor who form the bedrock of support for the government.

Even a small rise would help limit the government’s fuel subsidy burden to a budgeted $5.2 billion for 2011-12 and help it meet its fiscal deficit target of 4.6%.

But the government also appears wary of the effect of raising fuel prices on headline inflation, which is now just under 9%. Even a 10% hike in petrol and diesel prices would add around 70 basis points directly to headline inflation.

Oil minister S. Jaipal Reddy said on Tuesday the EGoM, which was due to convene late on Wednesday, would meet instead on 17 or 18 May.

One government source said the deferment was because of the unavailability of finance minister Pranab Mukherjee, who heads the panel, as he was busy with election results in an eastern Indian state.

One oil ministry source said the government could consider raising diesel prices by more than 4 rupees a litre, the steepest hike in about a decade.

The oil ministry source said the government had also been urged to raise prices of cooking gas and kerosene, used by hundreds of millions of middle class and poor Indians.

“We have given a set of options, but EGoM will take a view because all the time we can not take politically pleasant decisions,” the source said.

Window of opportunity

The government last raised petrol prices in January and has since repeatedly put off any decision on further increases in the face of a series of state elections. Those elections are now over, and the next major round of polls are not due until early next year.

The next session of parliament is also not due until July, giving the government enough time to recover from any opposition protests over raising of fuel prices.

The government is hoping for a good monsoon and is banking on current lower global crude prices for an easing of inflation to help soften the blow.

Raising prices could help shore up the bottom line of oil-related firms, which have not revised petrol prices since January, when global oil prices were below $100/barrel. Diesel prices were last raised in November.

In contrast, China last month raised gasoline and diesel prices by about 5%.

The oil sector is one of the biggest contributors to federal revenues as fuel taxes in India, which imports about 80% of its oil needs, are among the highest in the region, making up 46% of pump prices of petrol and 31% of diesel.

The federal government has partially compensated state fuel retailers through cash subsidies.

The country’s largest fuel retailer, Indian Oil last month said its debt is growing by Rs 50-60 every month.

Indian refiners’ are also taking a daily hit on the sale of subsidised fuel.